#951 Get a Budget Now…Write It Down…Track It Diligently

1 Jan

budget jar

Photo via flickr by Tax Credits.

So you have money that gets deposited into your bank account on a monthly or bi-weekly basis from your workplace. You have these bills to pay. You go out to get drinks once a week. You get some gas. Oh, you forgot about the oil change you need…and what about saving for the family trip to Cancun? If you’re ever going to find out where the money that’s coming in goes to and how not to run a deficit bigger than the government, then you need a budget. In fact a budget is the number one rule of financial health and thriftiness. So let’s start the new year with the basic of the basics – a budget and how to make your money work for you.

Rules are you must have all incoming and outgoing cash accounted for; you cannot spend more than you take in; you have to keep track of every purchase or income on a spreadsheet with some basic addition and subtraction; and you must keep up your budget tracking on a weekly, monthly and yearly basis.

Here we go:

A few years out of college, Elsa has negotiated a job offer for $40,000 in a medium-sized city with moderate living expenses. Before accepting, she has to decided what $40,000 will do for her. That’s about $3,333 a month before taxes and deductions. After calculating 35% in taxes and deductions that leaves her with $2,167 a month for expenses. The 10-year-old Honda she inherited from her parents is paid off, she has student loans, minimal credit card debt, is a bit of a gourmand and uses the internet but does not watch cable TV.

She starts a spreadsheet with $2,167 coming in the door…to see what goes out…

Rent: One bedroom apartment, heat and hot water included: $900
Electric bill: $40/month
Phone bill: $50/month
Internet: $35/month
Loans/Debt Repayment: $250/month
Groceries: $320/month
Gas: $100/month
Car maintenance: $100/month
Insurance: $100/month
Entertainment: $100/month
Savings: $110/month
Total spending: $2,105
Remaining cash: $62 (put into emergency fund separate from savings)

Pickled herring not your thing? Save for something you love. Photo via flickr by mtcarlson.

Pickled herring not your thing? Save for something you love. Photo via flickr by mtcarlson.

She decides she can squeak by, be comfortable with all the basics covered as well as have some room for a night out with friends and not miss the yearly trip to Sweden to enjoy pickled herring with her mother because she didn’t save.

Items like car maintenance and insurance aren’t a monthly expense, but she needs to account for them in her monthly budget so she is not surprised by the $250 tune up in a few months. She can also start to identify places in her budget to save money. Can she go generic to cut her grocery bill down? Can she combine her love of cooking with entertaining friends? Can she find a roommate situation or rent a studio for lower rent?

She tackles the new job and city with her budget. She finds an apartment that fits the bill, begins to make a grocery list and shops only once a week, cooks for herself and friends instead of going out, eats leftovers for lunch, makes do with the wardrobe she has and looks for deals in thrift stores or on eBay with they money she saves on groceries, she saves all her receipts and keeps track of her spending in Microsoft Excel.

Some months she’s in a panic because she blew her entertainment budget in one weekend and her car breaks down. Other months she’s feeling confident about being right on target. She knows this because she’s keeping track and can adjust her projections, identify new, recurring expenses she didn’t account for and see where she’s getting herself in trouble. Through the years as Elsa gets raises, new jobs, moves, get a boyfriend, a husband, a baby, she keeps her budget updated and adjusted for new expenses and increased costs. She makes new budgets for her wedding, the baby and buying a house. She’s a financial pro. Budget for the win!

Elsa is friends with Hilary who also moved to the same city with a similar job at the same time as Elsa. Hilary was excited about getting a job that actually paid! She was an unpaid intern living at her parents, now she has cash. She gets an apartment, goes out every weekend, shops with girlfriends, goes to the spa with her mom, lives on take-out and cheese nips, buys a new car and gets a few credit cards.

Spreadsheets are not just for accountants. If you can add and subtract, you can make a budget spreadsheet. Photo via flickr by Casey Serin.

Spreadsheets are not just for accountants. If you can add and subtract, you can make a budget spreadsheet. Photo via flickr by Casey Serin.

She doesn’t keep track of where her money goes, she just knows she runs out before the end of the month and uses her credit cards, which she tries to pay off, but then it leaves her with less money from the next paycheck. In five years, Hilary ends up with $18,000 in credit card debt but she’s keeping up with minimum payments. She meets the man of her dreams, and she’s going to have the wedding of her dreams with 180 guests in an all-weekend blowout. Her parents aren’t going to pay for it all, so she makes up the difference. What’s another $18,000 in debt anyway? With two incomes, her husband and her will be able to pay it off.

With $36,000 in debt from credit cards and the wedding, Hilary knows she can’t have kids, a house or go on vacation anytime soon. Luckily her husband paid for the honeymoon. But he has $80,000 in law school debt and has a starting salary of $50,000. Hilary gets laid off and spends her time not answering the phone for fear of creditors. She finally asks Elsa what her secret is. Elsa seems to have everything, but she can’t make that much money. Elsa tells Hilary, “I’ve always had a budget. If it’s not in the budget, I don’t get it.” 

There it is folks: The tale of two people – one living with a budget and one living without a budget. The happy ending is always there for those with a budget – written down, tracked and adjusted as life moves along.

Most of us are somewhere in between the two. But almost anyone could use better budget practices. You can go free with a spreadsheet. My sister loves the software You Need A Budget, which of course you’d have to budget for the paid service. I’ve tested the free trial, and it definitely warp speeds your budget prowess. The investment would be worth it if it helps get your financial house in order and saves you money by allowing you to keep better track of your spending. Start the new year fresh with renewed financial goals and a budget.

For a free budget program that really kicks your butt into gear, check out Mint.

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